TY  - JOUR
AU  - Fazzari,Steven M.
AU  - Hubbard,R. Glenn
AU  - Petersen,Bruce C.
TI  - Financing Constraints and Corporate Investment: Response to Kaplan and  Zingales
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5462
PY  - 2000
Y2  - July 2000
UR  - http://www.nber.org/papers/w5462
L1  - http://www.nber.org/papers/w5462.pdf
N1  - Author contact info:
Steven Fazzari
Campus Box 1208
One Brookings Drive
Washington University
St. Louis, MO   63130
E-Mail: fazz@wueconc.wustl.edu

R. Glenn Hubbard
Graduate School of Business
Columbia University, 101 Uris Hall
3022 Broadway
New York, NY  10027
Tel: 212/854-3493
Fax: 212/864-6184
E-Mail: rgh1@columbia.edu, ws2187@columbia.edu

Bruce C.. Petersen
Economics Department
Washington University
One Brookings Drive; CB 1208
St. Louis, MO   63130-4899
Tel: 314/889-5643
E-Mail: petersen@artsci.wustl.edu
AB  - Kaplan and Zingales (1995, hereafter KZ) criticize Fazzari, Hubbard and Petersen (1988, hereafter FHP) and much ensuing research that uses cross-sectional differences in firm behavior to test for financing constraints on investment.  This reply identifies flaws in the KZ analysis.  The questions KZ raise have been considered extensively and rigorously in the literature (most of which is not addressed in KZ), with results broadly similar to those of FHP.  We also challenge both of KZ's main results.  First, their finding that most of the FHP firms are not financially constrained relies on an inappropriate operational definition of what it means to be constrained.  Their definition ignores the incentives for firms that operate in imperfect capital markets to accumulate stocks of cash or maintain unused debt capacity to offset partially shocks to the flow of internal finance.  Second, the KZ regression results (lower sensitivity of investment to cash flow for firms classified as constrained than for those classified as unconstrained) are uninformative.  Their classification approach relies on possibly self- serving managerial statements that may present a distorted picture of firm's availability of finance.  It also employs misleading criteria to make unrealistically fine distinctions in the degree of financing constraints, and emphasizes financial distress rather than financing constraints.  Finally, econometric problems affect the interpretation of the KZ regressions.  We conclude that the KZ findings do not contradict the interpretation of the empirical results in FHP and subsequent research.
ER  -